The (HKG:2488) The dividend will be cut to CN¥0.2185 from last year’s payment for the same period on September 13. The dividend yield of 9.2% is still a nice boost to shareholder returns despite the cut.

While dividend yield is important for income investors, it is also important to consider large price swings, as these generally exceed any gains from distributions. Investors will be pleased to see that Launch Tech’s share price is up 69% over the past 3 months, which is good for shareholders and may also explain a decline in dividend yield.

Check out our latest analysis for Launch Tech

Launch Tech’s dividend is well covered by earnings

While it’s great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Launch Tech’s dividend represented a very large proportion of profits, and perhaps more worryingly, it represented 216% of cash flow. Paying out such a high proportion of cash flow may result in the company having to cut the dividend if the business runs into difficulties.

If recent trends continue, earnings per share are expected to grow 28.7% next year. If the dividend follows recent trends, we believe the payout ratio could reach 78%, which is quite high but still doable.

Launch Tech’s dividend was not consistent

Launch Tech has been paying dividends for some time, but its track record is not great. If the company cuts once, that is definitely not an argument against a possible cut in the future. Since 2017, the dividend has increased from a total of CNY 0.167 annually to CNY 0.40. This means that the company has increased its payouts by about 13% annually during this period. Despite rapid dividend growth in recent years, we have also seen a decline in payments in the past, which makes us cautious.

The dividend is likely to increase

With a relatively unstable dividend, it’s even more important to assess whether earnings per share are growing, which could indicate a rising dividend in the future. Launch Tech has impressed us with earnings growth of 29% per year over the past five years. Fast-growing earnings are great, but that’s rarely sustained without reinvesting in the business, which Launch Tech hasn’t done.

In summary

Overall, the dividend seems to have been a little high, which explains why it has now been cut. Given the lack of cash flows, it is difficult to imagine the company being able to maintain a dividend payment. We would probably look elsewhere for an income-producing investment.

It is important to note that companies with a consistent dividend policy generate more confidence among investors than those with an irregular one. Nevertheless, when analyzing a company, investors must consider a number of other factors besides dividend payments. For example, we have selected the following: 2 warning signs for Launch Tech investors should consider. If you are a dividend investor, you may also want to take a look at our curated list of high dividend stocks.

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